by Michael Schuman
August 31, 2011
Only a bit more than a month ago, the leaders of the euro zone were happily congratulating themselves on overcoming their differences and cobbling together a second bailout of troubled Greece. The package, which includes 109 billion euros ($157 billion) in fresh loans from an EU/IMF bailout fund, was supposed to rebuild investor confidence in the monetary union and alleviate mounting pressure on debt-heavy Greece. But it has done neither. The euro zone debt crisis intensified after the deal, turning up the heat on giants Spain and Italy. And now, bitter infighting within the zone threatens to derail the entire Greek bailout package. If the deal can't be rescued, the failure would deliver a blow that would sink Europe deeper into financial turmoil.
What's the problem? The continued disputes over the second bailout of Greece highlight just how difficult it will be for the euro zone to resolve the debt crisis and solidify its monetary union. The very structure of the union allows too many parties with too many conflicting interests to have too great an impact on policies that impact the future and stability of the entire euro zone. Until the leaders of Europe find some more efficient method of making and implementing decisions, it is hard to envision the euro zone ever escaping from its life-threatening trials.
The case of Finland best shows us how flawed governance in the zone really is. The government in Helsinki, which leans against continued European bailouts, agreed to the second Greek rescue on the condition that it receive collateral for renewed financial support. Subsequently, the Finns and the Greeks worked out a special side deal in which Athens would deposit a chunk of cash in an escrow account for Finland to ensure Helsinki's support for the bailout. (If that arrangement – Greece putting up cash to get more cash – doesn't make any sense to you, that's because it doesn't.) But that bilateral deal quickly fell apart. Germany opposed it, while other euro zone nations, including Austria and the Netherlands, understandably demanded the same privilege as Finland. The Finns won't back down on their demand, and euro zone finance ministries are still haggling over what to do.